Africa’s equities: Tiny by size, towering by returns

After a long period of underperformance, African stock markets are on a roll – not only in local currency, but in dollar terms too.

African stock markets have been on a tear over the past two years, posing all the familiar questions: what’s causing this? Is it sustainable? And, crucially, is there more to go?

What makes the stock market performance even more special, and arguably unusual, is that the returns have been good not only in local currency but in dollar terms too.

The ever-patient African stock market investors, always on guard for a smashing downturn, are in an unusually bullish mood. Paul Robinson, portfolio manager and head of Africa research at Laurium Capital – which invests the $250m Limpopo Africa Fund – says: “We strongly believe the best time to get into Africa was 12 months ago, and the second-best time is now.”

One of the big pluses for African stock markets this past year was that most African currencies in countries with substantial stock markets rose against the dollar. Consequently, the main headache for African stock market investors – volatile currencies – did not make a big impact.

But even on a two-year span, when both Nigeria and Egypt had massive currency devaluations, dollar returns from African stock markets were strong.

The other perennial problem for African countries – political instability – has been notably and blessedly absent from the big stock market countries. There were of course major political ructions in the recent past within the West African Economic and Monetary Union, which includes Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo. But because the exchange rate is more or less fixed and the countries that had big political ructions decided to stay within the union, the regional stock exchange, the Bourse Régionale des Valeurs Mobilières, has more than stood its ground.

“Africa markets are massively positive at the moment. Global flows are sloshing back into EM [emerging markets] and frontier [markets] (and thus Africa), and despite recent strong returns valuations are still really attractive,” says Robinson.

“There has been strong economic growth and company earnings recovery post the early 2024 devaluations in Egypt and Nigeria, which means even though stock prices have done well since then, valuations remain attractive, with low earnings multiples and high dividend yields.

“Kenya and Morocco are also doing well from an economic and earnings point of view, and Morocco is probably fairly fully priced, though Kenya stocks are still looking good.”

New stock markets

This performance is a breath of fresh air for African markets, and a change from a long period of underperformance. The JSE is one of the few with positive returns; others like Nigeria and Egypt lagged significantly.

It’s also worth noting that the markets are small. The Nigerian and Egyptian stock exchanges have a total market capitalisation of between $40bn and $50bn, the Botswana stock exchange a bit less, and the Nairobi exchange about half that.

For all its other woes, the JSE towers over African exchanges with a total market capitalisation of about $1.3-trillion, and also in the number of securities listed. Much of this difference is based on much smaller retirement industries in countries outside of Southern Africa, which partially explains why a small country like Botswana with its stronger pension industry is just a head smaller than huge countries like Nigeria and Egypt.

Consistently strong commodity markets have also underpinned the mining stocks in many African countries, but the sectors showing growth don’t stop there, and include banking, telecoms and retail. Growth is also underpinned by difficult policy changes in some countries, notably Nigeria, which now has a moderately free exchange rate.

The change in attitude is somewhat illustrated by the fact that new stock markets are appearing on the continent, notably in Ethiopia, which is converting its interbank platform into a fully-fledged exchange. Its second listing is due soon, and it aims to list 50 companies within the next five years. The interbank platform, active since late 2024, has already facilitated more than $1.1bn in transactions, suggesting good liquidity within the country’s banking sector.

The small size of the African stocks market suggests there is a long way to go, and international investor confidence needs to be strengthened and rebuilt. But the performance of the exchanges over the past two years will go some way to improving that.

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Article from Currency